Opportunity cost abounds

You know the old economics term: opportunity cost? It’s a helpful tool when looking at economic development. Wikipedia’s definition is not quite perfect but it works:

Opportunity cost is the theoretical cost of passing up the next best choice in making a decision in a perfect world.

Basically, in economic development terms, opportunity cost means being rigorous and very thoughtfull with how you are spending taxpayer dollars. For example, one might say that $4 million to attract Van Halen for a concert on PEI is a good expense. Some creative consultant armed with a set of input-output tables might even show a $4.1 million payback on that government investment (economic effect on the local economy).

However, even if you buy the $4.1 million argument (and I say beware of that), you still need to do an opportunity cost assessment and compare that $4 million investment in Eddie Van Halen’s rehab to spending $4 million on training 200 people on the skills to work in the animation industry or $4 million on expanding Slemon park or $4 million to set up an investment/trade office in India for the next 6-8 years.

Opportunity cost.

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0 Responses to Opportunity cost abounds

  1. Anonymous says:

    Guess we won’t know the opportunity cost for a $60M Caisse bail out, an $80M yarn experiment or $100M RDC fund (not much of which is used for ED).

    My point is not to highlight/question these specific decisions/circumstances. My point is that we are very quick to conclude that we cannot compete for the Fiat-sized opportunities. As your post suggests, the reality is, we could if we considered opportunity costs and were prepared to make the trade offs.

    Unfortunately, I doubt there is the public nor political will to make the necessary sacrifices.

  2. mikel says:

    Half of the above is true, but you can talk about opportunity cost more in line with the energy sector. No european or american investments that are increasingly looking at wind/solar/geothermal/natural energy sources is going to come near a province with a small population that publicly states that its on board with increased fossil fuels/nuclear energy.

    Saint John may have workers now, but I can’t even imagine any knowledge sector industry wanting to set up in a place with two nuclear reactors close by, a pulp mill, and two oil refineries. That ALSO is ‘opportunity cost’.

    But its an open question what is meant by ‘sacrifices’. In many cases they aren’t sacrifices at all, or much of ones. Private woodlot owners would hire more workers than the license holders if policy favoured that. People are fully prepared to make sacrifices, they recycle when it has hardly no benefit for them, and lots of other things. But people have different ideas of what is supposed to be ‘sacrificed’.

  3. richard says:

    Opportunity costs sounds a bit what-iffy to me, since you never know how the alternate investments would pan out.

    But if you want to know what attracts knowledge industries, I suspect most of the time its ‘knowledge’. Like attracts like. If you want knowledge industry, demand that your uni becomes a major research uni.

    Look at the University of Wisconsin – Madison, for example. One of the stronger research unis in the midwest US. A number of biotech plants (e.g. Promega) have located there. Why? Some are uni spin-offs; probably good access to well-trained grad students, not too far from Chicago, not too far from excellent outdoor recreation.

    And guess what, they settled there despite (arrgh) WI pulp mills and (double arrgh) nuclear plants.

    Seems to me if you are investing money in econ development, your best bet would be to build on what you already have. NB has natural resources in abundance, but a terrible record of value-added products from those resources. Investing in R&D and providing the right incentives to move in that direction would be more likely to provide a good result than farting about Fiat, IMHO.